This text is from blog famous currency strategist Joel Kruger .
THE ROAD TO RECOVERY – If equity markets are forward looking, they better start thinking about the end to global proponomics and monetary easing. The free money, unconditional support, coordinated intervention, help a brotha out times are coming to an end, and you can bet that with this certain fate will come a period of intensified profit taking in stock markets. I have said it a million times over and will say it again……the idea that US equities are less than 10% off 2007 record highs is absolutely absurd, and the realization that we are nearing the end of the free money gravy train, will surely result in some serious repositioning.
ECONOMIC ATROPHY – The 4 year cast is about to come off and though this cast has served well as a formidable healing device, we must not forget that there are consequences associated with such protective measures. I believe we are on the verge of entering a period of economic atrophy, where investors are going to need to learn to walk again, this time, without government assurances and hand holding that have been there since 2008. The artificial recovery over the past 4 years has helped to mitigate an otherwise disastrous imploding of the global financial system. But now that these extreme measures have taken us far enough away from certain death, the prognosis calls for a phase two weaning from those drugs that managed us through the tough times in the ICU.
FIRST IN FIRST OUT – So what does this mean for FX markets? It means that those currencies that everyone have been so bullish on over the course of the past 4 years, throughout this period of government proponomics, will soon fall out of favor, and undergo a major readjustment. The commodity bloc and emerging market currencies will no longer be the belles’ of the ball, and the US Dollar will emerge as the clear beneficiary from this shift in global monetary policy strategy. Remember….the Franc and Yen are no longer viable safe haven currency plays, and with the US Dollar as the only realistic alternative, any period of risk off trade, will open the door for some broad buying back into the buck. Oh and don’t forget about first in/first out. With the US economy likely to be the first to independently emerge from the depths of despair, the shift in Fed policy that comes with this recovery, will also have a positive influence on the US Dollar as yield differentials narrow markedly back in the Greenback’s favor.
THE WEEK AHEAD – On the shorter-term strategy front and for the week ahead, I will be focused on the Australian Dollar, looking for some follow through from last week’s sell-off and for a more pronounced underperformance as per my above analysis. I will also be looking for a reversal in EUR/GBP, and for some form of a short-term bottom in the Yen (USD/JPY top). As far as EUR/USD is concerned, it is too difficult to make any short-term calls at the moment, and while I retain an aggressive bearish outlook, we still could see an overshoot into the 1.3600-1.3800 area before underlying bearish resumption. Initial support comes in at 1.3350, while ultimately, a break back under 1.3250 would be required to officially relieve immediate topside pressure.